This section was created by Content Works, Postmedia’s commercial content studio.

This content is sponsored by CFA Institute

4 scenarios for oil if Israel attacks Iran

Fresh from PIMCO on Tuesday is a new report highlighting four oil price scenarios if Israel attacked Iran, from a spike of US$140 a barrel to a “Doomsday” situation where regional war causes prices to soar

Fresh from PIMCO on Tuesday is a new report highlighting four oil price scenarios if Israel attacked Iran, from a spike of US$140 a barrel to a “Doomsday” situation where regional war causes prices to soar.

“Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated,” Mr. Sharenow said.

Below, we provide a summary of the four scenarios Mr. Sharenow envisions for oil if Iran is attacked:

[np-related]

First scenario: This is the most optimistic. In this scenario, oil initially spikes to US$130-$140 per barrel after Israel attacks Iran, and then settles around US$120-US$125. This would occur if the International Energy Agency steps in and fills any shortfalls in the oil supply. Mr. Sharenow adds, however, that markets need to price in an attack before one occurs for this scenario to play out.

Second scenario: This one is slightly more grim. In it, Iranian exports are cut off for one month following an Israeli attack. This would result in prices reaching previous all-time highs of US$145 a barrel — and potentially even higher. In this scenario, the IEA and Saudi Arabia step in to fill help fill the gap, but uncertainty over capacity still drives oil prices higher. PIMCO eventually sees oil prices settling to US$130-135 a barrel after a few months.

Third scenario: This envisions a serious shock to the Iranian oil supply. Exports are lost for half a year, causing global oil prices to spike to US$150 for six months, with notable spikes above that level. Once the Iranian supply comes back online, PIMCO expects oil to settle back to US$110 or lower, depending on global demand.

Fourth scenario: This is the “Doomsday” scenario. Oil prices soar as Iran responds to the attack militarily. Oil production is not only effected in Iran, but also throughout the region as the ability to move oil through the Straits of Hormuz is affected. PIMCO doesn’t forecast where oil prices will be in this scenario. “Forecasting prices in the prior scenarios is dangerous enough,” Mr. Sharenow said. “So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario. Needless to say, even the modest Scenario 1 is enough to collapse global economic growth.”

Mr. Sharenow concludes:

“Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions,” he said. “Especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production.”